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November 16, 2017

Tezos, a company with over half a billion dollars in crypto assets, have been rocked by yet another lawsuit. Following a record-breaking ICO four months ago, founders Arthur and Kathleen Breitman have endured a torrid time after falling out with the head of the Tezos Foundation. Concerned investors filed a class action lawsuit on October 25. Now, it’s emerged that a second suit has been filed in Florida.

When ICOs Go Wrong

When husband and wife team Arthur and Kathleen Breitman raised $232 million in a high profile token sale this year, they were hailed as paragons of success. Their decentralized Half a Billion Dollar ICO Tezos Is Stung by Second Lawsuit in Under a Monthgovernance model was going to be the benchmark against which future tokenized projects would be measured. Following a well-publicized fallout with Tezos Foundation overseer Johann Gevers, however, the project became embroiled in controversy.

Investors, who were promised a stake in “a new digital commonwealth”, are still waiting for their decentralized wonderland to materialize. Frustrated and fed up, a group of them have lost patience and filed a class action lawsuit, the second to be leveled against the Breitmans in three weeks. The Tezos lawsuit, which was filed in a U.S. District Court in Florida, alleges that the couple sold unregistered securities in violation of federal law.

Court In The Act

With SEC chairman Jay Clayton recently opining that the majority of ICOs constitute securities, Tezos’ plaintiffs may have a prima facie case. In a wide-ranging complaint, the Breitmans, the Tezos Foundation, and Dynamic Ledge Solutions, the company which owns Tezos’ intellectual property, are all cited as defendants.

The damning complaint reads:

"Notwithstanding the defendants’ attempts to avoid governmental and private scrutiny, it is clear that the financiers were indeed profit-seeking investors in a security and that Defendants promoted and conducted an unregistered offering of securities, not a charitable fundraiser".

It also cites “many misrepresentations, factual omissions and unlawful activities engaged in by the defendants – it appears [the plaintiffs] cannot, and potentially will not, see any return on their investments”.

The world’s most expensive tote bag.

They Were Promised Tezzies But Wound Up With a Tote Bag

In a quote that has come back to haunt Kathleen Breitman, the project founder likened the company’s fundraiser to contributing to a public television station. Dismissing suggestions that “Tezzies” tokens could be securities, she said it was more like receiving “a tote bag”. With the Tezos project yet to get off the ground, and investors forced to watch in anguish as the cryptocurrencies they parted with appreciate in value, the event has cast a shadow over 2017’s ICO bonanza.

The $232 million of ethereum and bitcoin that Tezos raised back in July would be worth $590 million at today’s prices. There should be more than enough in the pot to cover legal fees and compensation, should the courts find against Tezos in either of their impending lawsuits. Whatever the outcome, the experience has left a bitter taste in the mouths of investors.

November 14, 2017

Users of Bithumb, the world’s largest cryptocurrency exchange, have filed a class action lawsuit following a costly server outage on November 12. Despite only lasting 90 minutes, the outage cost traders millions of dollars, occurring at the height of frenzied bitcoin cash trading. One customer complained of losing 250 million won ($223,000) in the chaos.

A Tale of Lost Won

Disgruntled traders gather outside Bithumb

As bitcoin cash was setting new records on Sunday, hitting all-time highs before plunging sharply, traders at Bithumb, which was leading the BCH rally, could only watch in frustration after the trading platform was knocked offline. Such was the ire of the affected traders that police were posted outside Bithumb’s Seoul headquarters on Monday morning as a precaution. The Korea Times quotes a Bithumb official as saying:

"We are discussing measures to compensate the investors. We will meet our legal and social responsibilities concerning this issue".

That’s not enough for some traders though, who are are still angered after missing out on the lucrative profits that could have been made on the BCH swings. The exchange, which accounts for around 75% of all South Korean trading volume, has now been hit by a lawsuit from around 3,000 customers who were affected by the server outage.

Crash and Cash

The basis for the affected traders’ legal action stems from the fact that Bithumb was previously compromised in June, when trading of Ripple was similarly impacted. They allege that there are critical issues with the exchange’s servers which still haven’t been fixed, leading to the bitcoin cash debacle. The impending legal action raises questions over the obligations of exchanges, and whether they can be held liable for downtime caused by unusually high trading volume or external factors.

Sour Grapes and Just Desserts

In June, a class action lawsuit was filed in Florida after Kraken exchange was floored by DDoS attacks, allegedly costing traders up to $1 million. Often, such suits settle out of court, with plaintiffs filing a formal complaint to compel the defendant to pay swift compensation. The likelihood of Bithumb customers being eligible for court-awarded compensation is dubious, with one financial expert opining that the exchange is not liable for such events.

Most of the trading during the weekend’s fierce bitcoin cash rally originated in South Korea, with the won leading the action. In the past 24 hours, bitcoin cash volume on Bithumb was $1.16 billion, with bitcoin a distant second at $445 million. Cryptocurrency trading is a risky business at the best of times, and the affected investors have earned little sympathy in other quarters of the bitcoin community.

Despite Bithumb’s server issues, the global cryptocurrency market set a new record on Sunday, hitting $25 billion in volume. Given the vast amounts of money at stake, it’s safe to assume the Bithumb lawsuit won’t be the last of its kind.

Images courtesy of Shutterstock, Naver, and Coincodex.

Kai Sedgwick

Kai's been assembling words for a living since 2009 and involved with bitcoin since 2013. He's previously written white papers for blockchain companies and is especially interested in P2P exchanges and DNMs.